Posted: December 12, 2018 2:28PM in AAPL Investorsedited December 2018

The continuing growth of Apple's Services arm won't last forever, warns Macquarie Research, advising investors of the possibility that revenue growth for that aspect of Apple's business could dip in 2019 for a variety of reasons.

The Services division has long been a source of reliable revenue growth for Apple, with the sector reliably seeing quarterly year-on-year growth of between 17 percent and 31 percent for the last three years. While flattening iPhone unit sales are causing issues for analysts Services has been seen as a highlight of Apple's finances, though that may change.

According to an investor note from Macquarie Research seen by AppleInsider, while it has previously advised Services becoming the future of the company, the high and dependable growth of the arm may waver and start to slow down. After expected full year 2018 growth of 26 percent, it is forecast that Services growth will decelerate in 2019 to 21.8 percent -- notably lower than the previous year.

Key pillars

The firm suspects the top three drivers of Services revenue for the last three years have been Licensing, the App Store, and AppleCare revenue, with each expected to slow down in the coming quarters. Smaller Services business, including Music, iCloud, and Apple Pay, are "not big enough to counter and pick up the slack to maintain current growth rates."

For Licensing, which is "driven largely by Google's Traffic Acquisition Cost payments," the increase in fees from making Google the default search option is thought to have helped increase revenue in the field. As Apple will soon be lapping last year's TAC increases, this will bring the growth rate for the area down.

Apple's Services revenue per quarter since 2014

The App Store is said to be reliant on Asia-Pacific markets for its growth for the last two years, with China, Japan, and Korea touted as major drivers of APAC growth in 2017. As the bulk of this revenue stems from games, Macquarie suggests the freeze on new game registration in China may drag the rate down in the next year.

It is a high-margin business for Apple, but even that is at risk, the note reads. With little change in the 30 percent commission rate, the firm sees regulatory, legal, and competitive pressures on the App Store potentially leading to a fee decrease eventually.

The third main pillar of Services revenue, AppleCare, saw 15 percent growth in 2018 due to the price step-up for the iPhone X from $129 to $199. While there may be modest gains from consumers due to the step-up, a similar level of increase is unlikely to appear in 2019, according to Macquarie.

Smaller Services

Despite the reported growth of Apple Music, and in turn increased revenue, music streaming is said to be a "structurally lower margin business" than the rest of the Services line, limiting its impact on growth.

While Apple Pay is going from strength to strength, including reaching over 1 billion transactions in a recent quarter and being used by 71 out of the top 100 merchants in the United States, the analysts doubt the service is a meaningful growth driver given the company's size, beyond adding extra functionality to Apple's hardware, like the iPhone and Apple Watch.

Noting the lack of a publicly-disclosed take-rate, it is suggested by Macquarie that Apple Pay would need to have a transaction volume of $300 billion in 2019 to make up 1 percent of Service's revenue.

While Macquarie covers most areas of Apple's Services business, it does not discuss the under-development and potentially-lucrative video efforts currently expected to launch in early 2019. The project, which has Apple spending at least $1 billion on original video content, may be provided to its existing Apple Music customers for free via the TV app pre-installed on its devices, along with paid subscription "channels" for third-party services -- which would likely spur subscriptions to the service.

Macquarie Research has set a 12-month share price target for Apple at $188, down from $222.

Others praise Services

While most analysts have focused on iPhone unit sales and ASP as being reasons to downgrade Apple's stock, Macquarie's negative take joins some other analysts praising the growing power of the Services business.

For Morgan Stanley's Katy Huberty, the Services portfolio could help Apple sustain 20-percent annual growth for the next five years, and could grow to over $100 billion per year by 2023. On the Chinese App Store growth slowdown, Huberty suggests it is a short-term stall that won't cause major issues for the Services arm, and will continue to draw massive revenues for the company.

Loup Ventures' Gene Munster has written multiple times about a paradigm shift in investor viewpoints of Apple, changing from a hardware-reliant company to "Apple as a Service." Munster is of the view that Apple's reliance on the iPhone for revenue growth with diminish over time, in favor of increasing its portfolio of software services.

APPL long here. I'm fairly happy with things product-wise.
I do hope they address the Mac Pro market sooner than later. Yes, I understand it's a smaller market but I know entire production houses who have no completed switching to Adobe software and PC hardware. The burn from FCP 7 is still felt today.
Another product I'm hoping for expansion are speakers. I think if you're entering that market - it's go big or go home. I would like to see a variety of speaker options for different applications/spaces. Lastly, I would wish more than anything that Apple avoids delving further into politics. Tim Cook's Orwellian statements recently are worrying. I don't have much to add other than that. I do hope they'll have more product innovations well beyond what I can imagine.

APPL long here. I'm fairly happy with things product-wise.
I do hope they address the Mac Pro market sooner than later. Yes, I understand it's a smaller market but I know entire production houses who have no completed switching to Adobe software and PC hardware. The burn from FCP 7 is still felt today.
Another product I'm hoping for expansion are speakers. I think if you're entering that market - it's go big or go home. I would like to see a variety of speaker options for different applications/spaces. Lastly, I would wish more than anything that Apple avoids delving further into politics. Tim Cook's Orwellian statements recently are worrying. I don't have much to add other than that. I do hope they'll have more product innovations well beyond what I can imagine.

At this point Tim may think he can parlay his position and visibility at Apple into a political career after he leaves.

Honestly, he’s been fairly good for Apple’s bottom line but I’d rather he left now than continue to divide and dissuade customers of all beliefs from buying Apple products and services, which should be presented to customers as politically neutral (other than for their privacy and recycling policies).

Just wait until the next earnings report. It's only a month-and-a-half away.

The problem is that the analysts never admit that they were wrong. Instead, they double-down with something like, "Well Apple made their numbers this quarter, but they won't make them the next."

It's amazing just how negative the analysts get on Apple considering Apple just had four record quarters and that Apple's fiscal 2018 net income is larger than their net sales from 2009. Net Sales have more than doubled (from $108B to almost $266B) in just 8 years (since Jobs left) as has Net Income (from $25.9B in fiscal 2011 to $59.6B in fiscal 2018.) Services alone would be a Fortune 500 company if spun off.

It's not that there aren't problem areas. iPad sales were flat, Mac unit sales were down 5.4% and iPhone unit sales were up only 0.4% in fiscal 2018. But Net Income was still up 23%. If Apple wanted more unit sales, they could/should lower prices, but maybe they care more about the $ than about the units.

What Apple needs to do is to find "the next thing". Maybe they thought it was going to be AppleTV or the smart speaker, but those obviously aren't it. I still believe that 15-20 years out, Apple has to be a Robotics and AI company and get into home automation in a much bigger way with a total solution.

I think the upside to all of these bad press articles is that Apple has seen that they can’t keep all their eggs in the iPhone basket.

With the new MacBook Air and Mac mini, they have shown they still are interested in those markets. We should see a new Mac Pro, and new displays that will have a greater sense of urgency to appear.

Apple seems to shine best when they are under pressure.

Im glad that the stock has tanked a bit in order to throw some cold water on the leadership to focus more on significant innovating and less on profits. Charging $9 on a headphone to lightning cable that used to come with a device isn’t going to make up for the mass amount of customers who just paid $29 to get a battery to keep their iPhone 6 another year or more.

They took all of their resources off of other revenue streams to focus on the iPhone and now they realize they should have back filled them when sales were starting to peak.

Just wait until the next earnings report. It's only a month-and-a-half away.

The problem is that the analysts never admit that they were wrong. Instead, they double-down with something like, "Well Apple made their numbers this quarter, but they won't make them the next."

It's amazing just how negative the analysts get on Apple considering Apple just had four record quarters and that Apple's fiscal 2018 net income is larger than their net sales from 2009. Net Sales have more than doubled (from $108B to almost $266B) in just 8 years (since Jobs left) as has Net Income (from $25.9B in fiscal 2011 to $59.6B in fiscal 2018.) Services alone would be a Fortune 500 company if spun off.

It's not that there aren't problem areas. iPad sales were flat, Mac unit sales were down 5.4% and iPhone unit sales were up only 0.4% in fiscal 2018. But Net Income was still up 23%. If Apple wanted more unit sales, they could/should lower prices, but maybe they care more about the $ than about the units.

What Apple needs to do is to find "the next thing". Maybe they thought it was going to be AppleTV or the smart speaker, but those obviously aren't it. I still believe that 15-20 years out, Apple has to be a Robotics and AI company and get into home automation in a much bigger way with a total solution.

The next thing is wearables... and guess what, Apple already has them nailed down, with loads of room to grow. Oh, and you still need an iPhone for the best, secure experience they provide. It doesn’t have to be the best iPhone, just a relatively recent one.

Lastly, I would wish more than anything that Apple avoids delving further into politics. Tim Cook's Orwellian statements recently are worrying. I don't have much to add other than that. I do hope they'll have more product innovations well beyond what I can imagine.

Er, what? What Orwellian statements?

Apple is a US company, and controversial US politics affect it. As a US citizen, it has the right to involve itself in matters that affect it and its work force. That’s how democracy works.

APPL long here. I'm fairly happy with things product-wise.
I do hope they address the Mac Pro market sooner than later. Yes, I understand it's a smaller market but I know entire production houses who have no completed switching to Adobe software and PC hardware. The burn from FCP 7 is still felt today.
Another product I'm hoping for expansion are speakers. I think if you're entering that market - it's go big or go home. I would like to see a variety of speaker options for different applications/spaces. Lastly, I would wish more than anything that Apple avoids delving further into politics. Tim Cook's Orwellian statements recently are worrying. I don't have much to add other than that. I do hope they'll have more product innovations well beyond what I can imagine.

At this point Tim may think he can parlay his position and visibility at Apple into a political career after he leaves.

Honestly, he’s been fairly good for Apple’s bottom line but I’d rather he left now than continue to divide and dissuade customers of all beliefs from buying Apple products and services, which should be presented to customers as politically neutral (other than for their privacy and recycling policies).

Yeah no. I don't know Cook, but I find it very difficult to come to that conclusion. It seems much more likely to me that he's standing up for the civil rights he and many of his workforce and customer base want here in the US.

Cook leave, because he's "dividing" customers? Yeah that's insanity. Cook is one of the most successful CEO in modern history, he's not going anywhere just because conservatives are uncomfortable with their unpopular policies being called out. And newsflash -- Apple is essentially a liberal, progressive company. If you're not, it's your views who are out of alignment with Apple's principles, not the other way around. They won't change because old white guys are getting uncomfortable.

I think the upside to all of these bad press articles is that Apple has seen that they can’t keep all their eggs in the iPhone basket.

Nor have they. Their other lines are bigger revenue drivers than other entire companies, including Silicon Valley darlings.

iPhone just happens to dwarf those. If you removed it, their other segments are still very healthy numbers. But thankfully, we don't have to remove them in some silly parallel universe argument, because we live here, in this one, where the iPhone still kills it more than any other handset.

I find it amusing when people/analysts say things like “Apple needs to create the next big thing” or Apple isn’t innovating.

Apple aside, no other company is prepared for augmented reality and has the means for a successful consumer launch. Period.

You can’t just slap a Qualcomm processor on some glasses and get a product. People also want something that’s not bulky or obvious, looking at you Google, Oculus and Microsoft.Most tech savvy people don’t know the level of advancements required for AR.

Apple will leap forward, while others step, let’s hope they get it right...

I think the upside to all of these bad press articles is that Apple has seen that they can’t keep all their eggs in the iPhone basket.

Nor have they. Their other lines are bigger revenue drivers than other entire companies, including Silicon Valley darlings.

iPhone just happens to dwarf those. If you removed it, their other segments are still very healthy numbers. But thankfully, we don't have to remove them in some silly parallel universe argument, because we live here, in this one, where the iPhone still kills it more than any other handset.

They have by pulling resources during the Steve Jobs years from the Mac and other product lines. They never filled them back with the same type of talent.

They didn’t think they needed to.

Now that the whole market, is showing an upgrade slowdown, they could have used better development in the other lines of products to help pick up the slack of the smartphone upgrade slowdown.